AUSTRALIA

Melbourne Cup Quant Style

Top ranking horses  Odds @ Once in a Sea Moon? Number Horse Name 6pm Mon Event 4 Sea Moon $ 13.10 8 Dandino $ 12.00 . It‟s that time of year again where we shift our attention from stocks to stallions 10 Fawkner $ 16.10 to come up with our top picks for the Melbourne Cup. The Macquarie Quant team transform racing stats into traditional quant signals to form a model that 22 Dear Demi $ 13.50 ranks the runners in the race. 16 Royal Empire $ 22.50 6 Fiorente $ 7.20 Impact Source: Macquarie Research, Race TAB, November 2013 . Horses at the top of the model include Sea Moon, Dandino, Fawkner, Dear Bottom ranking donkeys  Demi, Royal Empire and Fiorente. Odds @ Number Horse Name 6pm Mon . Last year we and many punters were taken by surprise as Green Moon 3 Red Cadeaux $ 39.00 thundered home to take the cup. We have spent the last 12 months grappling with what went wrong. Did the pressure get to us? Should we have factored 11 Mourayan $ 59.00 in the extra weight Dunaden was carrying? Or was it simply time for a reality 9 Ethiopia $ 50.10 check? Despite heavy ridicule at social outings, we have committed to putting 14 Masked Marvel $ 38.00 our reputation on the line again and attempt to pick a winner for the big race. 20 Ibicenco $ 62.70 1 Dunaden $ 40.80 . Each year we look to the market to guide us and make slight adjustments to Source: Macquarie Research, Race TAB, November 2013 our model. Riskier stocks have had stronger returns of late as the global economy recovers. 2013 has also seen a flurry of IPOs as the market appetite The field is very evenly spread in 2013 for new equity improved. We therefore introduce a tilt favouring the new Number of horses with odds under $25 Number of horses with odds under $10 equity; i.e. horses that have not raced in the Cup before. 18 16 . At time of publishing there was only 1 horse paying under $10 (see chart on 14

12 left). There were also 16 horses paying less than $25 which is significantly 10 more than usual. The implication here is that the field is quite spread and 8 there are good payoffs for skilful horse pickers.

Number Horsesof 6 4 . Our favoured approach to betting remains the same. Firstly a bet on the top 2 horse and then going for the trifecta using the top quartile of horses. This best 0 2007 2008 2009 2010 2011 2012 2013 mirrors the way we (quants) approach equity investing. The payoff to our Source: Macquarie Research, Race TAB, November 2013 strategy since 2007 is shown inside. . The best way to implement the trifecta strategy is via a „box trifecta‟ on the top 6 horses in the model (see your local bookie for a description of this bet). Analysis

Quant factors used in the model

Quant Signal Factor Quant Signal Quant Signal

Sentiment Odds Hit Rate Win % Momentum Odds movement Other Age Form Barrier Value Avg prize money per race Australian Form Quality Odds dispersion Previous Cups Source: Macquarie Research, November 2013

4 November 2013 . We must stress that this model is not intended to be taken seriously. Last year Macquarie Securities (Australia) Limited was a timely reminder that it is still gambling! The Quant team has limited

knowledge of horse racing and the purpose of this article is primarily fun

Please refer to the important disclosures and analyst certification on inside back cover of this document, or on our website www.macquarie.com/disclosures.

Macquarie Private Wealth Melbourne Cup Quant Style

Analysis . The table below shows the breakdown for each horse on each of the different factors we use in the model.

Fig 1 Detailed rankings

Rank # Horse Name OS Age Barrier Odds Prize Money Form Win % Odds Odds Movement Odds Dispersion Age Barrier 1st Cup? Form Total Score MAX SCORE 5 17.5 12.5 20 15 7.5 5 5 2.5 10 100 1 4 Sea Moon GB 6 7 $ 13.10 3.8 13.1 12.5 20 11.3 7.5 2.5 5 3 10 88.1 2 8 Dandino GB 7 4 $ 12.00 3.8 17.5 9.4 20 15.0 7.5 0.0 5 3 5 85.6 3 10 Fawkner 6 8 $ 16.10 5.0 13.1 12.5 15 11.3 7.5 2.5 5 3 10 84.4 4 22 Dear Demi 4 16 $ 13.50 3.8 13.1 6.3 20 15.0 5.6 5.0 0 3 5 76.3 5 16 Royal Empire IRE 5 11 $ 22.50 1.3 17.5 12.5 15 11.3 5.6 5.0 5 3 0 75.6 6 6 Fiorente IRE 6 5 $ 7.20 5.0 13.1 6.3 20 3.8 7.5 2.5 5 0 10 73.1 7 5 Brown Panther GB 6 6 $ 16.80 1.3 13.1 12.5 15 15.0 3.8 2.5 5 3 0 70.6 8 17 Voleuse De Coeurs IRE 5 21 $ 19.90 1.3 17.5 12.5 15 7.5 7.5 5.0 0 3 0 68.8 9 12 Seville GER 6 9 $ 20.80 3.8 8.8 3.1 15 11.3 5.6 2.5 5 3 10 67.5 9 13 Super Cool 4 13 $ 24.50 5.0 8.8 9.4 10 15.0 1.9 5.0 5 3 5 67.5 11 24 Ruscello IRE 5 24 $ 58.40 1.3 17.5 6.3 5 15.0 3.8 5.0 0 3 10 66.3 12 18 Hawkspur 4 18 $ 14.30 2.5 8.8 9.4 20 3.8 5.6 5.0 0 3 3 60.0 13 21 Verema FR 5 3 $ 23.7 2.5 17.5 9.4 10 3.8 3.8 5.0 5 3 0 59.4 14 23 Tres Blue IRE 4 20 $ 25.70 2.5 17.5 12.5 10 3.8 3.8 5.0 0 3 0 57.5 15 7 Foreteller GB 7 15 $ 23.30 2.5 13.1 6.3 10 11.3 5.6 0.0 0 3 5 56.3 16 19 Simenon IRE 7 12 $ 23.90 1.3 13.1 3.1 10 7.5 5.6 0.0 5 3 5 53.1 17 15 Mount Athos IRE 7 22 $ 15.00 1.3 13.1 9.4 20 3.8 3.8 0.0 0 0 0 51.3 18 2 Green Moon IRE 7 10 $ 22.40 5.0 4.4 9.4 15 7.5 1.9 0.0 5 0 3 50.6 19 1 Dunaden FR 8 1 $ 40.80 5.0 13.1 6.3 5 7.5 7.5 0.0 5 0 0 49.4 20 14 Masked Marvel GB 6 2 $ 38.00 2.5 8.8 6.3 10 3.8 1.9 2.5 5 3 5 48.1 20 20 Ibicenco GER 6 17 $ 62.70 2.5 13.1 3.1 5 7.5 1.9 2.5 0 3 10 48.1 22 9 Ethiopia 5 14 $ 50.10 3.8 4.4 3.1 5 15.0 3.8 5.0 5 0 3 47.5 23 11 Mourayan IRE 8 19 $ 59.00 3.8 8.8 3.1 5 7.5 1.9 0.0 0 0 3 32.5 24 3 Red Cadeaux GB 8 23 $ 39.00 5.0 4.4 3.1 5 11.3 1.9 0.0 0 0 0 30.6 Source: Macquarie Research, Race TAB, November 2013

. Sentiment was measured by the last available odds before publication as this is representative of the mood of the market. Horses with strong sentiment include Fiorente, Sea Moon, Dandino, Mount Athos, Hawkspur and Dear Demi. . Momentum was measured by movement in the odds from one month prior until the latest available odds. Horses with strong momentum include Dear Demi, Brown Panther and Super Cool. . Yield was measured by average prize money per race as this represents the return of each horse. Leaders in this category were Fawkner, Super Cool, Green Moon, Dunaden and Red Cadeuax. . Hit rate was measured by the horses winning percentage and by the form over the last five races for the horse. Horses with a good hit rate include Sea Moon, Fawkner, Royal Empire, Brown Panther and Voleuse De Coeurs and Tres Blue. . Quality/Risk was measured by odds dispersion amongst bookmakers to indicate the variance of the perceived value of the horses. Horses with low odds dispersion are Sea Moon, Dandino, Fawkner, Fiorente and Voleuse De Coeurs. . Australian form takes account for the large number of foreign horses in the field. If the horse has successfully raced, won or placed in Australia it receives a higher weighting (depending on result). . 1st Cup Looks at whether or not the horse has run in the last few Melbourne Cups. Here we are hoping new entrants will perform favourably and thus get a boost. . We also took into account factors that made up previous winners of the Melbourne Cup. Starting barrier can give the horse an obvious advantage. . According to historical analysis, winning horses are almost twice as likely to have started in one of the first 14 barriers. . The age of the horse can also make a difference. Almost half of winners since 1861 have been aged four or five.

4 November 2013 2 Macquarie Private Wealth Melbourne Cup Quant Style

Historic Profitability of the model . The Macquarie Quant team first ran the Melbourne cup model in 2007. Taking a box trifecta on the Top 6 horses in the model in 2007 paid handsomely. . In 2008, we warned to be wary of the „Black Swan‟ and unfortunately our model yielded little success. At $41, Viewed came from nowhere to win the cup. Most of the race favourites were left behind. . In 2009, Shocking was at the top of our model and took out the race. . 2010 saw Americain bring home the bacon. Whilst the horse was not our top pick the box trifecta paid off again with odds of roughly $250-$300 depending on your location. . 2011 left us on the edge of our seats with Dunaden winning only by the slightest of margins paying $9.10. Red Cadeaux came from nowhere and was actually ranked near the bottom of our model. . We were taken by a “Once in a Green Moon” event in 2012 with Green Moon taking out the race and rank outsider Jakkalberry making up the top 3. . Our strategy involves a bet on the top pick in the model and also betting on the top quartile of horses for the trifecta. This mirrors the way we (quants) approach equity investing. . The best way to implement the trifecta bet is via a „box trifecta‟ on the top 6 horses in the model (see your local bookie for a description of this bet). The top six horses are shown on the previous page. . Below we shows the profitability of betting a combined $1000 on 2 bets in each of the years we‟ve run the model:  The top-ranked horse for a win  A box-trifecta on the top six horses in the model.

Fig 2 Cumulative Profit on an annual $1000 investment in Win/Box Trifecta Quant Strategy

$14,000

$12,000

$10,000

$8,000

$6,000

$4,000

$2,000

$0 2006 2007 2008 2009 2010 2011 2012

Cumulative Profit

Source: Macquarie Research, Race TAB, November 2013

. We must stress again however that this model is not intended to be taken seriously. The Quant team has very limited knowledge of horse racing and the purpose of this article is primarily fun. . And… Past performance is no indication of future returns. Happy punting!

4 November 2013 3 Macquarie Private Wealth Melbourne Cup Quant Style Important disclosures: Recommendation definitions Volatility index definition* Financial definitions Macquarie - Australia/New Zealand This is calculated from the volatility of historical All "Adjusted" data items have had the following Outperform – return >3% in excess of benchmark return price movements. adjustments made: Neutral – return within 3% of benchmark return Added back: goodwill amortisation, provision for Underperform – return >3% below benchmark return Very high–highest risk – Stock should be catastrophe reserves, IFRS derivatives & hedging, expected to move up or down 60–100% in a year IFRS impairments & IFRS interest expense Benchmark return is determined by long term nominal – investors should be aware this stock is highly Excluded: non recurring items, asset revals, property GDP growth plus 12 month forward market dividend speculative. revals, appraisal value uplift, preference dividends & yield minority interests Macquarie – Asia/Europe High – stock should be expected to move up or Outperform – expected return >+10% down at least 40–60% in a year – investors should EPS = adjusted net profit / efpowa* Neutral – expected return from -10% to +10% be aware this stock could be speculative. ROA = adjusted ebit / average total assets Underperform – expected return <-10% ROA Banks/Insurance = adjusted net profit /average Medium – stock should be expected to move up total assets Macquarie First South - South Africa or down at least 30–40% in a year. ROE = adjusted net profit / average shareholders funds Outperform – expected return >+10% Gross cashflow = adjusted net profit + depreciation Neutral – expected return from -10% to +10% Low–medium – stock should be expected to *equivalent fully paid ordinary weighted average Underperform – expected return <-10% move up or down at least 25–30% in a year. number of shares Macquarie - Canada Outperform – return >5% in excess of benchmark return Low – stock should be expected to move up or All Reported numbers for Australian/NZ listed stocks Neutral – return within 5% of benchmark return down at least 15–25% in a year. are modelled under IFRS (International Financial Underperform – return >5% below benchmark return * Applicable to Asia/Australian/NZ/Canada stocks Reporting Standards). only Macquarie - USA Outperform (Buy) – return >5% in excess of Russell Recommendations – 12 months 3000 index return Note: Quant recommendations may differ from Neutral (Hold) – return within 5% of Russell 3000 index Fundamental Analyst recommendations return Underperform (Sell)– return >5% below Russell 3000 index return

Recommendation proportions – For quarter ending 30 September 2013 AU/NZ Asia RSA USA CA EUR Outperform 50.56% 56.87% 48.78% 41.00% 61.75% 47.10% (for US coverage by MCUSA, 5.85% of stocks followed are investment banking clients) Neutral 38.95% 25.18% 42.68% 54.40% 34.43% 30.89% (for US coverage by MCUSA, 3.90% of stocks followed are investment banking clients) Underperform 10.49% 17.94% 8.54% 4.60% 3.83% 22.01% (for US coverage by MCUSA, 0.00% of stocks followed are investment banking clients)

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Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/disclosures.

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General Disclosure: This research has been issued by Macquarie Securities (Australia) Limited (ABN 58 002 832 126, AFSL No. 238947) a Participant of the Australian Securities Exchange (ASX) and Chi-X Australia Pty Limited. This research is distributed in Australia by Macquarie Equities Limited (ABN 41 002 574 923, AFSL No. 237504) ("MEL"), a Participant of the ASX, and in New Zealand by Macquarie Equities New Zealand Limited (“MENZ”) an NZX Firm. Macquarie Private Wealth‟s services in New Zealand are provided by MENZ. Macquarie Bank Limited (ABN 46 008 583 542, AFSL No. 237502) (“MBL”) is a company incorporated in Australia and authorised under the Banking Act 1959 (Australia) to conduct banking business in Australia. None of MBL, MGL or MENZ is registered as a bank in New Zealand by the Reserve Bank of New Zealand under the Reserve Bank of New Zealand Act 1989. Any MGL subsidiary noted in this research, apart from MBL, is not an authorised deposit-taking institution for the purposes of the Banking Act 1959 (Australia) and that subsidiary‟s obligations do not represent deposits or other liabilities of MBL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of that subsidiary, unless noted otherwise.

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4 November 2013 4